I first wrote about this topic last November in Forbes.
As I pointed out then, Yahoo!'s patent trove has been an undiscussed part of its overall value — although when you consider that Yahoo!'s “core business” is currently being valued at less than zero, it's hard to say that only the patents have been ignored.
Obviously, it can be difficult to assess the value of patents. Few believed that Motorola Mobility's patents were going to be worth $12.5 billion to Google, or that Nortel's patents were going to be worth $4.5 billion to the consortium of players who bought it in July.
Yet several people I talked to last fall thought that Yahoo!'s patents were worth a significant amount and that Facebook might be the company most at risk if Yahoo! suddenly becomes more aggressive in defending its intellectual property. (To date, it has been passive and acquiescent on this front.)
Keep in mind that Yahoo!'s own board seems to recognize the value of Yahoo!'s patents. In October, The New York Times wrote the following in a story updating the state of Yahoo!'s deal negotiations:
“But Yahoo has also talked up some of its other assets, including more than 1,000 patents, including those for search and display advertising, that the company believes would fetch high prices.”
I spoke with the two New York Times DealBook reporters who wrote this story after it appeared, and both acknowledged that they believed Yahoo!'s board clearly sees value in the patent portfolio.
So where is the value?
One obvious area is in the whole social networking space. Yahoo! has several relevant patents in that area even though it is not known for social networking.
Are they enough to squash Facebook in a protracted courtroom battle? It's unclear, partly because Yahoo! has been so docile and conciliatory around patents. It's also unclear, because it's hard to assess a patent's value until it is tested in court.
So all I can go on is the word of several people familiar with the patents who believe there is significant value in Yahoo!'s social patents.
But what is Facebook's best answer to this potential legal threat? One possible answer might be the 2003 purchase by Zynga's Mark Pincus and LinkedIn's Reid Hoffman of a broad patent for social networking from the now-defunct SixDegrees.com social networking site.
Pincus and Hoffman reportedly own 0.5 percent each of Facebook. Hoffman's venture firm Greycroft also own about 1.5 percent of Facebook, so he has an incentive to use that patent to protect his Facebook investment from attacks from the likes of Yahoo! or others.
The SixDegrees.com patent was granted in 2001, long before Facebook was around. It has to do with the “method and apparatus for constructing a networking database and system.”
Interestingly, at the time of the purchase, Hoffman and Pincus were worried about Friendster's new owners. They also expected that Kleiner Perkins Caufield & Byers and Benchmark Capital would outbid them.
Hoffman described the SixDegrees.com patent in a CNET story at the time as “central to this field.”
We may never know, but it's possible that Hoffman's ownership of the patent is what allowed him to take such a big stake in Facebook (likely for cross-licensing it). Hoffman was supposed to be responsible for introducing Peter Thiel to Mark Zuckerberg, and both Hoffman and Pincus were part of the first financing round.
The second area where Facebook is potentially vulnerable from Yahoo! is search. Back in 2004, Yahoo! pushed Google to a pre-IPO settlement of cash and preferred stock. The deal had to do with the Overture patent relating to the GoTo.com patent 6,269,361. This was around the whole paid-search business model that AdWords/AdSense copied from GoTo.com.
Most people see Yahoo! as making a colossal blunder in agreeing to the deal. Even today, 96 percent of Google's revenues come from advertising related to AdSense and AdWords. Yahoo! should have played hardball, but didn't.